Buying a home is an exciting, yet complex financial journey–and your mortgage will likely be your biggest long-term financial commitment.
But this isn’t necessarily a bad thing. In fact, buying a home can be an amazing decision that can leave you with a ton of financial security and equity in the future.
Some people might even say that it’s one of the best investments you can make.
But it’s important to understand which type of mortgage loan is going to work best for you.
Well, with a myriad of options available, you might feel like you’re navigating a labyrinth when choosing a mortgage loan type.
However, having a basic understanding of the common mortgage loan types can make your home-buying process smoother.
In this article, we’ll explore several different types of mortgage loans to help you make an informed decision.
Not all of them will be right for you. But hopefully, this will help to educate you a little bit and help you to figure out the right path to research further.
The most traditional form of mortgage, a fixed-rate mortgage, provides you with an interest rate that stays the same throughout the life of the loan.
This type is particularly attractive for those who prefer stable, predictable monthly payments.
Adjustable-Rate Mortgages (ARM)
In contrast to fixed-rate mortgages, adjustable-rate mortgages offer an initial low interest rate that will adjust at set intervals.
This can be a good option if you plan to sell the house before the interest rate increases significantly.
Federal Housing Administration (FHA) Loans
Designed for first-time homebuyers or those with less-than-perfect credit, FHA loans typically allow for lower down payments and have more lenient qualification requirements.
However, they usually require borrowers to pay for mortgage insurance.
If you’re a first-time homebuyer, odds are good that this loan type will be a serious contender when you walk into the bank to ask for a loan.
Veterans Affairs (VA) Loans
If you’re a veteran, active-duty service member, or qualified spouse, VA loans can be an excellent choice.
They come with zero down payment options and no private mortgage insurance (PMI) requirements.
USDA Rural Development Loans
These loans are targeted at rural homebuyers and come with zero down payment options.
To qualify, the property must be located in an eligible rural area, and the borrower must meet specific income requirements.
This isn’t going to be the type of loan you can use to buy a flat in New York City. But if you’re planning to start a ranch in the middle of ‘nowhere Nevada,’ well, this may just be one of the better types of loans to look into.
If you’re looking to buy a high-priced property, jumbo loans may be the right choice.
These loans exceed the conforming loan limits set by federal housing agencies and typically have stricter qualification criteria.
Physician Mortgage Loans
Especially relevant for medical professionals, physician mortgage loans often come with zero down payment options and no PMI.
They’re designed to accommodate the unique financial circumstances that many doctors face, such as high earning potential paired with significant student loan debt.
If you’d like some additional information on these types of loans, check out this article.
This type of mortgage features low initial payments but requires you to pay off the remaining balance in a large lump sum (the “balloon”) at the end of a specific term, usually five to seven years.
While risky, this can be an option for those planning to sell the property before the balloon payment is due.
With an interest-only mortgage, you initially pay only the interest on the loan for a set period.
Afterward, you’ll start paying off the principal amount, which can result in significantly higher monthly payments.
This type can be suitable for those expecting a future increase in income.
If you’re buying a new home before selling your existing one, a bridge loan can provide temporary funding.
However, they come with higher interest rates and are generally best for those with strong credit and significant home equity.
Understanding the landscape of mortgage loan types can seem daunting, but having a foundational grasp of your options empowers you to make better financial decisions.
Whether you’re a first-time homebuyer or a seasoned real estate investor, there’s likely to be a mortgage loan type tailored pretty specifically to your needs and circumstances.
As always, consulting with mortgage professionals is probably the best way to ensure that you’re selecting the best loan for your unique financial situation.